Brexit JigsawEU state aid law is a cornerstone of EU competition law and policy. It helps preserve a level playing field between companies competing in the internal market. Crucially, it operates only within the EU. Thus, EU state aid rules do not apply to financial support granted by non-EU authorities to companies in the EU, or to companies outside the EU but with activities in the EU. The exception to this rule is the UK, but not for long.

The UK exited the EU membership earlier this year, subject to a transition period ending on 1 January 2021. During this transition period, the UK remains subject to EU state aid rules. Even after the end of the transition period, as things currently stand, the UK could continue to be subject to EU state aid rules:

  • First, the EU Withdrawal Agreement converts EU state aid law into UK law as “retained EU law” on 1 January 2021. The draft State Aid (EU) Exit Regulations 2019, prepared by the May government, if adopted by Parliament, would substitute the European Commission with the UK’s Competition and Markets Authority as the competent authority to approve state aid in the UK and it would also make other consequential changes to the regime. However, the substance of the UK rules would remain aligned with EU state law.
  • Second, Article 10 of the Northern Ireland Protocol to the EU Withdrawal Agreement makes any subsidy in Northern Ireland, including potentially any UK-wide subsidy, subject to EU state aid rules. This provision was an essential condition in the EU Withdrawal Agreement to avoid the reintroduction of a hard border between Ireland and Northern Ireland.

However, things are unlikely to stay the way they currently stand.

In a recent press release, the Johnson government announced that:

  • The UK will repeal EU state aid rules from the status of “retained EU law” and will follow World Trade Organisation (WTO) subsidy rules and other international commitments, replacing the EU state aid laws, from 1 January 2021
  • The UK does not intend to return to the 1970s approach of trying to run the economy or bailing out unsustainable companies
  • The government will publish “clear guidance on WTO rules” before the end of the year for public authorities and devolved administrations – “business will have the chance to comment on the design of the UK’s own domestic regime of subsidy control next year”

As regards Northern Ireland, the Johnson government adopted a new Internal Market Bill and included two clauses, which – if approved by Parliament – would give the secretary of state the power to disapply or modify the effect of Article 10 of the Northern Ireland Protocol, even if doing so would be incompatible or inconsistent with international law. This aspect of the Internal Market Bill is controversial and it has caused many members of Parliament to voice their concerns and Sir Jonathan Jones QC, HM procurator general and treasury solicitor, to resign from his post.

Moreover, as reported in our insight, the European Commission has proposed a new foreign subsidies control regime modelled on EU state aid rules but applying to financial support granted by non-EU countries, such as the UK. Indeed, the new EU foreign subsidies control regime, if adopted, could potentially make any UK state aid to businesses competing in the EU subject to a notification obligation and prior approval by the European Commission, much in the same way as under EU state aid rules.

Many questions remain unanswered as to which state subsidies control regime will apply in the UK and the answers to many of these questions pivot on the central issue of whether or not the UK and the EU will reach a future international trade agreement between them involving a new UK subsidies control regime.

As negotiations are ongoing, it remains to be seen if a third way can be found before the end of the transition period to accommodate, on the one hand, the UK’s desire for full sovereignty over subsidies and, on the other hand, the EU’s internal market imperative. Time is ticking fast.